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Après Macron – Schulz en marche?

On Sunday Emmanuel Macron embarks on a five-year term as President of the second largest EU country. An overwhelming two-thirds of those casting a valid ballot – and a sizeable 42% of all eligible voters – backed him. French people are weary of the political system, as manifested by the demise of the traditional centre-right and centre-left parties. While France faces several problems, its economic and social model is far from the basket case that it is often made out to be by those antithetic to a large public sector and who want more liberté and less égalité et fraternité.

Nonetheless, the fact is that without external support Macron and his La République en marche! Movement/party will fail. The reasons for this are not the superficial ones linked to the candidate himself. His youth and inexperience are not the issue. He may lack a party machine but he does not need a parliamentary majority for the party emerging from his movement. I would be surprised if he fails to put together a working-majority coalition between centrists and the right wing of the social democrats (PS) and the left wing of the conservatives. With the PS pulverised and the Republicans demoralised, I don’t anticipate any shortage of takers.

His problem – and it is very much Europe’s problem – is rather that his programme is very unlikely to work electorally under prevailing circumstances. Essentially, ‘Macronism’ consists of a two-handed, and supposedly joined-up, strategy. At home, ‘structural’ reforms to increase competitiveness and stimulate growth, along with moderate fiscal consolidation to reduce government debt levels. In Europe, far-reaching changes to economic governance in the direction of a step-change in political integration, driven by a new and equal partnership between that old two-cylinder motor: Germany and France. The alleged link is that the efforts to strengthen France domestically will force Germany to recognize it as an equal partner, while falling debt levels reduce the perceived risk to German policymakers of pooling sovereignty.

There are many reasons why this sensible-sounding approach is highly unlikely to work, unless external conditions change for the better.

The first is that ‘structural’ reforms in the sense of liberalization of labour and other markets and cuts in social programmes – however desirable they might be in the longer run – do not, by themselves, create jobs and improve social outcomes. What creates employment is spending on (demand for) domestically produced goods and services. But ‘structural’ reforms typically reduce domestic demand and spending, squeezing wages and margins and encouraging precautionary saving (see this recent IMF report). They often also cause substantial social conflict and resulting economic disruption. The reforms will usually improve international competitiveness, which boosts foreign demand. But in a large country such as France this effect takes many years to really tell. Governments pursuing reforms are thus often urged to marry them to expansionary demand-side policies. Yet France has no control over monetary policy and, as a cornerstone of his strategy, Macron has committed to (albeit mild) fiscal consolidation. Taken together this means that the domestic wing of the strategy will not deliver substantial results over the next five years. Indeed, if the recessionary impulses predominate and there is substantial social strife, unemployment could end up rising rather than falling.

Consequently, Macron needs progress on the European front for both political and economic reasons. Politically he needs to be able to show French voters that he has regained the grande nation’s rightful status as Germany’s (more or less) equal and to draw the poison of the anti-German ressentiments on the hard right and left. And economically he needs some ‘give’: faster demand growth and wage and price inflation in its main trading partners, especially Germany, stimulating demand for French goods and facilitating economic rebalancing while reducing the totemic German trade surplus; plus some leeway to expand domestic demand through economic governance reform.

The problem is that all the proposals Macron has made for greater policymaking integration – a Euro Area parliamentary chamber, a European finance minister, and debt mutualisation of various forms – have been resolutely and consistently rejected by Germany (and some other countries) in recent years. In principle that could change, of course. However, the initial reactions from German policymakers and economic commentators have been almost universally hostile: it seems they have learnt nothing from brushing off Francois Hollande’s initiatives back in 2012. And here’s the rub: Macron’s linkage of domestic success and German acceptance of EMU reform may sound plausible, but it is wrong-headed. Why should German policymakers change their mind if France were to embark on an ambitious reform strategy? Why will they not simply urge him on? Virtue is its own reward! Paradoxically, the only thing that might budge the sentiment of current Germany policymakers, is the threat of a return of Mme Le Pen, her chances strengthened by higher unemployment, social strife and a visibly failing centrist French government.

En marche Herr Schulz?

There are two ways out of this impasse. The first is a belief, for which there are some signs, that the recovery in the Euro Area as a whole is about to accelerate and that France, in particular, is on the cusp of a rebound. Thomas Fricke has recently made this case (in German), pointing to improved competitiveness and profit margins, faster growth in France’s trading partners and robust sentiment indicators; he draws a comparison to Germany in the mid-2000s.

It would seem extremely unwise to rely on such cyclical serendipity, however. It requires at a minimum that negative shocks (from terrorism to Trump) do not materialise. Even if they do not, it is far from clear that the strengthening economic momentum will be sufficient to more than offset the policy-induced drag in France: unemployment would still remain high during the next Presidential term and there will be no boost to Macron’s prestige on the political side. And let us not forget that France is not the only issue: an anti-EU vote in the Italian elections in spring 2018 also needs to be averted. We need more substantial progress fast.

The second strategy is potentially much more promising. Initially, it requires changing the mind of one man.

Martin Schulz, the chancellor candidate of the German SPD, must be made to realise that he is currently the single most important political figure in Europe. He must see Macron’s victory as the opportunity that it is for the German social democrats and himself personally. And he must forcefully campaign, up to September’s Bundestagswahl, on a manifesto that commits to economic policy integration in the Euro Area and to Germany orienting domestic policy to wider concerns. He must take on board at least some of the ideas put forward by Macron or similar proposals for fiscal risk sharing from other quarters. He should commit to more public investment and faster wage growth in Germany itself. The political aim must be to improve the SPD’s standing at least enough to exert a substantial influence on EU policy in the new German government. In practical terms the minimum political goal is to replace Wolfgang Schäuble as German finance minister with someone who understands the economics and politics of monetary union.

Many ifs. There are, it must be said, reasons to be sceptical about the likelihood of such a course being adopted. I saw with my own eyes how advice given to the SPD leadership in 2011, as Greece slid into crisis, that it must differentiate the party from Merkel and take a line guided by European solidarity (as enlightened self-interest) was ignored. The failure to take such a stance and rather to hitch the party’s colours to Merkel and Schäuble’s mast was fateful not only for Greece, but also for German (and European) social democracy (here and here). Schulz has just played down – in a speech to a business audience – the importance of Germany’s current account surpluses: to say the least this is not encouraging.

Optimism of the will

There are several reasons for optimism, however. And, if the above analysis is correct, then we need to focus on them given the lack of a more plausible alternative. Here, in no particular order of importance, are five:

The Schulz bounce in the polls is over. The SPD lost power in Schleswig-Holstein last Sunday and the experience may be repeated (or will only just be avoided) in its North-Rhine Westphalian heartland next Sunday. His strategy of distancing himself from structural reforms of the mid-2000s policies and talking of social justice will clearly not be enough. The SPD needs distinctive policies.

Merkel and Schäuble’s policies in Europe have failed and people are tired of them. Taking a line focusing on investment, balanced growth and European solidarity would enable the SPD to criticize these failed policies more freely and tap a popular desire to finally turn the page on the crisis. And since when were higher wages and better public infrastructure and services at home a losing electoral strategy? Saying the same things on Europe as the conservatives but just expressing them more softly is a losing strategy. Schulz as former President of the European Parliament can convincingly sell a European agenda to a German audience in a way that Gabriel or Steinbrück could not.

At the technical level quite detailed and far-reaching proposals were made joint by Macron and Gabriel, back in 2015 when both were economics ministers. (in French, in German). These form a basis to refer back to and build on.

Macron is, for the moment at least, popular and Schulz and the SPD could import some much-needed élan and star allure.

Finally, we are witnessing a wider process of reflection on European reform and specifically the deepening of EMU, with support from European institutions, including the – in Germany still widely revered – European Central Bank. Faced with the nationalist threat there has been a re-awakening of pro-European sentiment amongst citizens, manifested most visibly by the Pulse of Europe

You are welcome to criticize the weakness of these factors from an analytical point of view. But, bitte schön, what is your alternative strategy? Only fools can imagine that the road to long-term success goes through the short-run failure of the French government and the likely failure of the European project in its current form. France, Germany and the whole of Europe need Martin Schulz en marche! If existing German policymakers will not change their mind, as seems likely, then the policymakers must be changed.